CHAPTER 3 Consumer Preferences and Choice

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03-Salvatore-Chap03.qxd 08-08-2008 12:41 PM Page 58 58 PART TWO Theory of Consumer Behavior and Demand 3.1 Utility The ability of a good to satisfy a want. Total utility (TU) The total satisfaction received from consuming a good or service. Marginal utility (MU) The extra utility received from consuming one additional unit of a good. Util The arbitrary unit of measure of utility. discussed in the first two sections of the chapter. In Section 3.3, we examine the convergence of tastes internationally. We then introduce the budget line, which gives the constraints or limitations consumer’s face in purchasing goods and services. Constraints arise because the commodities that the consumer wants command a price in the marketplace (i.e., they are not free) and the consumer has limited income. Thus, the budget line reflects the familiar and pervasive economic fact of scarcity as it pertains to the individual consumer. Because the consumer’s wants are unlimited or, in any event, exceed his or her ability to satisfy them all, it is important that the consumer spend income so as to maximize satisfaction. Thus, a model is provided to illustrate and predict how a rational consumer maximizes satisfaction, given his or her tastes (indifference curves) and the constraints that the consumer faces (the budget line). The “At the Frontier” section presents a different way to examine consumer tastes and derive a consumer’s indifference curves. The several real-world examples and important applications presented in the chapter demonstrate the relevance and usefulness of the theory of consumer behavior and choice. UTILITY ANALYSIS In this section, we discuss the meaning of utility, distinguish between total utility and marginal utility, and examine the important difference between cardinal and ordinal utility. The concept of utility is used here to introduce the consumer’s tastes. The analysis of consumer tastes is a crucial step in determining how a consumer maximizes satisfaction in spending income. Total and Marginal Utility Goods are desired because of their ability to satisfy human wants. The property of a good that enables it to satisfy human wants is called utility. As individuals consume more of a good per time period, their total utility (TU) or satisfaction increases, but their marginal utility diminishes. Marginal utility (MU) is the extra utility received from consuming one additional unit of the good per unit of time while holding constant the quantity consumed of all other commodities. For example, Table 3.1 indicates that one hamburger per day (or, more generally, one unit of good X per period of time) gives the consumer a total utility (TU) of 10 utils, where a util is an arbitrary unit of utility. Total utility increases with each additional hamburger consumed until the fifth one, which leaves total utility unchanged. This is the saturation point. Consuming the sixth hamburger then leads to a decline in total utility because of storage or disposal problems. 1 The third column of Table 3.1 gives the extra or marginal utility resulting from the consumption of each additional hamburger. Marginal utility is positive but declines until the fifth hamburger, for which it is zero, and becomes negative for the sixth hamburger. 1 That is, some effort (disutility), no matter how small, is required to get rid of the sixth hamburger. Assuming that the individual cannot sell the sixth hamburger, he or she would not want it even for free.
03-Salvatore-Chap03.qxd 08-08-2008 12:41 PM Page 59 TABLE 3.1 Total and Marginal Utility QX TUX MUX 0 0 ... 1 10 10 2 16 6 3 20 4 4 22 2 5 22 0 6 20 −2 FIGURE 3.1 Total and Marginal Utility In the top panel, total utility (TU) increases by smaller and smaller amounts (the shaded areas) and so the marginal utility (MU) in the bottom panel declines. TU remains unchanged with the consumption of the fifth hamburger, and so MU is zero. After the fifth hamburger per day, TU declines and MU is negative. CHAPTER 3 Consumer Preferences and Choice 59 22 20 16 10 Total utility of X TUX 0 12 10 8 6 4 2 0 -2 Marginal utility of X MUX 1 2 3 4 5 6 Q X Quantity of X Plotting the values given in Table 3.1, we obtain Figure 3.1, with the top panel showing total utility and the bottom panel showing marginal utility. The total and marginal utility curves are obtained by joining the midpoints of the bars measuring TU and MU at each level of consumption. Note that the TU rises by smaller and smaller amounts (the shaded areas) and so the MU declines. The consumer reaches saturation after consuming TU X 5 6 1 2 3 4 Q X Quantity of X MUX
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CHAPTER 3 Consumer Preferences and Choice

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